Americans are squeezed by rising healthcare bills but instead of targeting the root causes of high drug prices, states such as Arkansas, Louisiana, and Wisconsin are rushing to regulate Pharmacy Benefit Managers (PBMs), one of the few effective forces holding the line on prescription prices.
PBMs help lower prescription drug costs for consumers and employers in an imperfect, highly regulated market. Through formulary management, negotiated discounts, rebate structures, and tools like step therapy and prior authorization, PBMs bring price discipline, something sorely lacking in healthcare. If state legislatures gut PBMs’ ability to operate by taking away the market-driven tools they use on behalf of their customers, patients and plan sponsors will be left paying more.
In a recent report, Joel Zinberg describes PBMs as players “within a complex supply chain” managing reimbursements and payments throughout the system. While critics use the term “middleman” in a derogatory manner this role allows PBMs to take on the costs of connecting manufacturers, pharmacies, and insurers, while aligning incentives toward cost savings and improved outcomes for consumers.
Unlike drug manufacturers, who set prices, or pharmacies, who dispense medications, PBMs have a stake in cost reduction. They get paid based on how much they save their customers. Contrary to what critics claim, PBM’s also do not earn “outsize profits.” A recent study found PBM’s net profit margin (revenue minus payments and other expenses) was 2 percent. That means for every dollar in revenue, a PBM earned 2 cents.
Comparatively speaking, this was far less than the net profit margins of drug manufacturers (26 percent), pharmacies (4 percent), and insurers (3 percent).
Rising healthcare costs are primarily driven by manufacturer monopolies, FDA-induced supply bottlenecks, and anti-competitive patent gamesmanship, all of which pharmaceutical companies have exploited to their sole financial benefit, while painting PBMs as villains.
Unfortunately, lawmakers across the country are falling for it. For example, lawmakers in Wisconsin, want to severely curtail the very tools PBMs use to contain rising drug costs, while mandating new provisions. In fact, just one of those provisions (mandating higher dispensing fees for prescription drugs) is estimated to add at least $20 million in additional healthcare costs annually. Rather than addressing the real drivers of high prices, this legislation would hobble the one actor in the system whose business model depends on delivering savings.
Ahead of Wisconsin, Arkansas passed the first-of-its-kind legislation barring PBMs from owning or operating pharmacies in the state starting January 1, 2026. That law has already led to the announced closure of dozens of pharmacies, hundreds of job losses, suspension of home delivery prescription drug programs, and restricted access to specialty pharmacies, which handle complex medications, such as injectables and oncology drugs. Lawmakers in Georgia, Louisiana, New York, and other states are also pushing to pass similar legislation. These actions ignore the critical value created by PBMs both in cost saving and improving health outcomes.
Research shows that PBMs generate $145 billion in net annual value. Even after factoring in their operational costs, PBMs help lower drug prices, improve medication adherence, and cut non-drug healthcare expenses by roughly $40 billion each year. They also advance drug innovation by boosting adoption of new treatments, contributing an estimated $13 billion annually in societal value through future drug development.
Fundamentally, PBMs act as a “buyers’ club” for prescription drugs, pooling purchasing power to counterbalance drugmakers’ market power. By negotiating discounts and creating preferred networks, PBMs can direct volume toward selected supplies, helping to drive prices down. If a manufacturer raises prices, a PBM can switch to alternatives, cutting off that manufacturer’s access to their network.
Eliminating key PBM cost-control tools will shift even more power back to drug companies and drive up the coverage costs for the small and mid-sized businesses that make up the backbone of state economies. These employers depend on PBMs to tailor drug benefits to their unique workforces. Mandating one-size-fits-all policies from a state capital will only limit options.
Any economist will tell you that when you limit options, you get fewer choices, less access, and higher prices. Economist Vance Ginn notes that between Arkansas and Louisiana, 100 stores threaten to close, with 2,700 jobs being put into jeopardy. Wisconsin may face similar consequences if anti-PBM measures move forward.
When PBMs negotiate rebates or establish preferred pharmacy networks, they do so by using clinical data and a legal obligation to act in the best interests of their plan sponsors, the employers who provide healthcare for millions. Removing PBM flexibility will force those employers to pass the burden onto their employees, cut benefits, or drop coverage entirely.
Beyond cost savings, PBMs also enhance patient safety. They monitor for drug interactions, ensure appropriate dosages, and help prevent opioid misuse and fraud. Stripping away these services in the name of regulation would be a public health setback.
The real solution to high drug prices lies in more competition, more flexibility, and more consumer choice. PBMs provide all three. It’s time policymakers treated them as part of the solution—not the scapegoat.
Thomas Savidge is a Research Fellow at the American Institute for Economic Research. Follow him on Twitter/X: @thomas_savidge.
